The Ambassador in Cuba (Guggenheim) to the Acting Secretary of State
[Received January 27.]
Sir: Supplementing my despatch No. 44 of January 10, 1930,18 with reference to the financing of the Central Highway, I have the honor to report that the proposal made by Warren Brothers has not been accepted.
From a conversation which I had with President Machado on January 23, 1930,19 I learned that the Cuban Government has decided to conclude arrangements with the Chase National Bank of New York, which will obviate the necessity for the temporary financing proposed by Warren Brothers and also by the Compañía Cubana de Contratistas.
It is understood that the Cuban Government was on the point of accepting the proposal when Mr. R. I. Barr, vice president of the [Page 685]Chase National Bank arrived in Habana. Apparently Mr. Barr came for the express purpose of concluding the negotiations that have been pending for a number of weeks between the Government and the Bank. The fact that the Government was about to conclude an arrangement with Warren Brothers, even though it was a professedly temporary arrangement, doubtless hastened action by the Bank. The latter’s local attorney, Dr. Enrique Hernández Cartaya, had advised against the acceptance of the Warren Brothers proposal, not merely because it was unnecessary in view of the Bank’s proposal but also because it might give rise to legal complications.
According to the terms of the final agreement, as outlined by Mr. Barr, there has been no important change in the Bank’s original proposal. The proposal is that the Cuban Government consent to the conversion of the public works certificates which the Bank now holds in its portfolio in the amount of $40,000,000 and which under existing contracts must, with the $20,000,000 of certificates issued to the American public, be paid off by 1935, into bonds maturing in 1945, under the same conditions as to security for payment of principal and interest, that is, by a pledge of 90 per cent of the special public works revenues. The bonds would bear 5½ per cent interest and would be amortized in ten annual payments beginning with 1935 or 1936.
As a result of this conversion the Government would be free to apply to further construction work at least $15,000,000 per annum for the next five years. In delaying a public offering of the $40,000,000 of public works certificates it now holds, the Bank, Mr. Barr feels, has done the Cuban Government a great favor, since, with the issuance of these certificates, it would probably have been difficult for the Government to raise additional loans against the public works revenues prior to 1935, when the last of the certificates would mature.
An important feature of the Bank’s proposal is the offer to extend a fresh credit of $20,000,000 to be availed of during the year 1930. The Government wanted the Bank to increase its additional commitment to $40,000,000. This the Bank felt would be an unwise undertaking on its part, according to Mr. Barr, not only because the Bank cannot be certain as to conditions in the bond market later this year or at any time next year but also because it is not convinced of the wisdom of the Government in borrowing so large an amount at this time.
Apparently, the Government was convinced that the Bank would not increase its commitment beyond $20,000,000. The Bank made some concessions in the matter of commissions, etc., to be paid on the certificates it holds, but won its point with reference to the price at which the certificates are to be converted into bonds, namely 94 per cent of par. The Bank felt that the bonds could not be offered to the [Page 686]public at more than 98 and that a spread of at least four points was necessary to cover the cost of underwriting, distribution, etc.
It would seem, therefore, that the further financing of the special public works program has been definitely arranged and it is probable that the Department will be called upon shortly to give its opinion on the proposal of the Chase Bank. As stated by the President in my interview with him on January 23, 1930, the Cuban Government proposes to follow the same procedure as was adopted in 1928 in the case of the $50,000,000 credit of the Chase National Bank,20 that is, to have the bankers submit the loan proposal to the State Department, and to have the latter in due course instruct this Embassy to inform the Cuban Government as to its decision.
I shall send you a further despatch on this phase of the subject in relation to the Platt Amendment21 in the near future.
I have [etc.]